Saturday, June 23, 2007

The New Global Economy and its Challenges

Doing some research today, I ran across an article, titled A Goldilocks World Economy?, that does a good job of encapsulating several of the new realities we are all facing in this age of globalization, outsourcing, and rapid advancements in information and communication technologies.

Unfortunately, these challenges are being systematically mismanaged by governments and economist who do not understand the differences between our current era and prior decades of limitation resource, the author concludes.

Mr. Schwenninger writes:
[T]he integration of China, India, and the former Soviet Union into the global economy... has, in effect, doubled the global labor force in the course of a decade, raising the return on capital and dampening wages and inflation....

[An]other development relates to the technological advancements... associated with the new economy, which have substantially increased U.S. and world productivity growth.

Policymakers seem to have forgotten that an economy with excess labor and rapid productivity growth tends toward underconsumption, resulting in weak demand and slower growth. Rapid productivity growth has the paradoxical effect of displacing labor and raising unemployment, weakening the bargaining power of labor and decreasing wages. Countervailing government policies are needed to ensure that the benefits of productivity gains are widely shared and that aggregate demand is maintained. But policies such as real increases in the minimum wage or generous retraining programs, or new international public spending programs to promote more consumption abroad, have not been an acceptable part of the new economy's policy framework....

The paradox of the productivity problem is exacerbated in a world economy increasingly dominated by high-savings, production-oriented economies, like many of the Asian economies. These economies tend to underconsume and overproduce, and thus they depend on export demand to drive their economic growth. The overall result is not only inadequate and uneven worldwide demand but an unhealthy dependence on the U.S. consumer market....

With too much supply chasing too little demand, firms in many sectors of the global economy have no choice but to engage in cutthroat measures. Companies are thus trying to increase profitability, not by tapping expanding world markets but by cutting costs, especially wage costs, which further reduces global aggregate demand.....

The notion of an economy of abundance and plenty is counterintuitive to the experiences and training of many of today's leading economists and policymakers who are still rooted in the supply-constrained 1970s and '80s. Yet today's economic conditions of rapid productivity growth and excess labor and capital have less in common with those decades than with the bubble years of the 1920s. Thus, both in our domestic and international policies, we may be at risk of repeating, albeit on a smaller scale, the mistake that an earlier generation in the 1920s made in not understanding the challenges associated with rapid productivity growth and an abundant supply of labor and capital. Those challenges require us to think more creatively about spreading economic prosperity not only in the United States but also in emerging economies. |Sherle R. Schwenninger. A Goldilocks World Economy? 23 World Policy Journal (Winter 2006)|
If you'd like to read the entire article, drop me an email or find the World Policy Journal in a local library using Open Worldcat.

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